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BIOS > SEC Filings for BIOS > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for BIOSCRIP, INC.

Form 10-Q for BIOSCRIP, INC.


12-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Audited Consolidated Financial Statements, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the "Annual Report") filed with the U.S. Securities and Exchange Commission ("SEC"), as well as our Unaudited Consolidated Financial Statements and the related notes thereto included elsewhere in this report.
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities


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Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential," and similar expressions. Specifically, this Quarterly Report contains, among others, forward-looking statements about:

our ability to successfully integrate the operations of the CarePoint Partners Holdings LLC ("CarePoint") home infusion business (the "CarePoint Business");

our ability to make principal and interest payments on our debt and unsecured notes and satisfy the other covenants contained in our senior secured credit facility and other debt agreements;

our high level of indebtedness;

our expectations regarding financial condition or results of operations in future periods;

our future sources of, and needs for, liquidity and capital resources;

our expectations regarding economic and business conditions;

our expectations regarding potential legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs;

our expectations regarding the size and growth of the market for our products and services;

our business strategies and our ability to grow our business;

the implementation or interpretation of current or future regulations and legislation, particularly governmental oversight of our business;

our ability to maintain contracts and relationships with our customers;

sales and marketing efforts;

status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements;

our ability to maintain supplies and services, which could be impacted by force majeure events such as war, strike, riot, crime, or "acts of God" such as hurricanes, flooding, blizzards or earthquakes;

future capital expenditures;

our ability to hire and retain key employees;

our ability to successfully execute our succession plans;

our ability to execute our acquisition and growth strategy;

our ability to successfully integrate businesses we may acquire; and

other risks and uncertainties described from time to time in our filings with the U.S. Securities and Exchange Commission (the "SEC").

Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. Important factors that could cause such differences include, among other things:

risks associated with increased government regulation related to the health care and insurance industries in general, and more specifically, home infusion and pharmacy benefit management providers;

our expectation regarding the interim and ultimate outcome of commercial disputes, including litigation;

unfavorable economic and market conditions;

disruptions in supplies and services resulting from force majeure events such as war, strike, riot, crime, or "acts of God" such as hurricanes, flooding, blizzards or earthquakes;

reductions in federal and state reimbursement for our products and services;

delays or suspensions of Federal and state payments for services provided;

efforts to reduce healthcare costs and alter health care financing;

effects of the Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, which amended PPACA, and the related accountable care organizations;

existence of complex laws and regulations relating to our business;

achieving financial covenants under our senior secured credit facility and unsecured notes indenture;

availability of financing sources;

declines and other changes in revenue due to the expiration of short-term contracts;

network lockouts and decisions to in-source by health insurers including lockouts with respect to acquired entities;

unforeseen contract terminations;

difficulties with the integration of the CarePoint Business;

our ability to comply with debt covenants in our senior secured credit facility and unsecured notes indenture and the increased leverage the Company incurred upon completion of the acquisition of the CarePoint Business;

difficulties in the implementation and ongoing evolution of our operating systems;

difficulties with the implementation of our growth strategy and integrating businesses we have acquired or will acquire;


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increases or other changes in the Company's acquisition cost for its products;

increased competition from competitors having greater financial, technical, reimbursement, marketing and other resources could have the effect of reducing prices and margins;

disruptions in our relationship with our primary supplier of prescription products;

the level of our indebtedness and its effect on our ability to execute our business strategy and increased risk of default under our debt obligations;

introduction of new drugs, which can cause prescribers to adopt therapies for existing patients that are less profitable to us; and

changes in industry pricing benchmarks, which could have the effect of reducing prices and margins.

You should not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Business Overview

We are a national provider of infusion therapy services that partners with patients, physicians, hospitals, healthcare payors and pharmaceutical manufacturers to provide clinical management solutions and the delivery of cost-effective access to prescription medications and services. Our services are designed to improve clinical outcomes for patients with chronic and acute healthcare conditions while controlling overall healthcare costs. As of the filing of this report, we have a total of 81 locations in 29 states.

Our platform provides nationwide service capabilities and the ability to deliver clinical management services that offer patients a high-touch, community-based and home-based care environment. Our core services are provided in coordination with, and under the direction of, the patient's physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, respiratory therapists and physical therapists, work with the physician to develop a plan of care suited to our patients' specific needs. Whether in the home, physician office, ambulatory infusion center or other alternate sites of care, we provide products, services and condition-specific clinical management programs tailored to improve the care of individuals with complex health conditions such as gastrointestinal abnormalities, infectious diseases, cancer, multiple sclerosis, organ transplants, bleeding disorders, immune deficiencies and heart failure.

Segments

Following the sale of our Home Health Business on March 31, 2014, our operating and reportable segments are "Infusion Services" and "PBM Services." These segments reflect how our chief operating decision maker reviews our results in terms of allocating resources and assessing performance.

The Infusion Services operating and reportable segment provides services consisting of home infusion therapy, respiratory therapy and the provision of durable medical equipment, products and services. Infusion services include the dispensing and administering of infusion-based drugs, which typically require additional nursing and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes. Home infusion services also include the dispensing of certain self-injectable therapies.

The integrated pharmacy benefit management ("PBM") Services operating and reportable segment consists of integrated PBM services, which primarily consists of discount card programs. The discount card programs provide a cost effective alternative for individuals who may be uninsured, underinsured or may have restrictive coverage that disallows reimbursement for certain medications. Under these discount programs, individuals who present a discount card at one of our participating network pharmacies receive prescription medications at a discounted price compared to the retail price.

Strategic Assessment

In 2010, we commenced a strategic assessment of our business and operations. The assessment examined our market strengths and opportunities and compared our position to that of our competitors. As a result of this assessment and ensuing assessments, we have focused our growth on investments in the Infusion Services segment, which remains the primary driver of our growth strategy.

On February 1, 2012, we entered into a Community Pharmacy and Mail Business Purchase Agreement (the "2012 Asset Purchase Agreement") by and among Walgreen Co. and certain subsidiaries (collectively, the "Buyers") with respect to the sale of certain assets, rights and properties (the "Pharmacy Services Asset Sale") relating to our traditional and specialty pharmacy


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mail operations and community retail pharmacy stores. We received a total purchase price of $173.8 million resulting in a pretax gain of $108.2 million net of transaction costs and other one-time charges.

Following the completion of the Pharmacy Services Assets Sale, we continued to execute our strategic plan by deploying the proceeds toward strategic business acquisitions to maximize future stockholder value.

On July 31, 2012, we acquired 100% of InfuScience, Inc. ("InfuScience") for a cash payment of $38.3 million. The purchase price could increase up to an additional $3.0 million of contingent consideration based on the results of operations during the 24 month period through July 31, 2014. InfuScience historically acquired, developed and operated businesses providing alternate site infusion pharmacy services through five infusion centers located in Eagan, Minnesota; Omaha, Nebraska; Chantilly, Virginia; Charleston, South Carolina; and Savannah, Georgia.

On February 1, 2013, we acquired 100% of the ownership interest in HomeChoice Partners, Inc. ("HomeChoice") for a cash purchase price of $72.9 million at closing. The purchase price may also be increased by contingent consideration of up to $20.0 million if HomeChoice reaches certain performance milestones in the two years following the closing. We funded the acquisition with a combination of cash on hand and drawing on our revolving credit facility. HomeChoice is a provider of alternate-site infusion pharmacy services. Prior to our acquisition, HomeChoice serviced approximately 15,000 patients annually and has 14 infusion pharmacy locations in Pennsylvania, Washington, D.C., Maryland, Virginia, North Carolina, South Carolina, Georgia, Missouri, and Alabama.

On August 23, 2013, we completed the acquisition of substantially all of the assets and assumption of certain liabilities that constituted the home infusion business (the "CarePoint Business") of CarePoint Partners Holdings LLC. The total consideration paid to the sellers was $211.1 million in cash plus a contingent payment of $10.0 million if the CarePoint Business achieves a specified level of product gross profit during the one year period following the closing date. If the specified level of product gross profit is not achieved, no contingent consideration will be due to the sellers. CarePoint was a provider of home and alternate-site infusion therapy for patients with complex, acute and chronic illnesses. CarePoint serviced approximately 20,500 patients annually and had 28 sites of service in nine states in the East Coast and Gulf Coast regions prior to our acquisition.

Consistent with our continuing strategic evaluation of our non-core businesses and our decision to continue to focus growth initiatives and capital in the Infusion Services segment, we completed the sale of substantially all of our Home Health Services segment to LHC Group, Inc. and certain of its subsidiaries on March 31, 2014. We received consideration at closing of approximately $59.5 million in cash, subject to adjustment following the completion of post-closing calculations of net working capital. A portion of the net proceeds from the sale was used to pay down a portion of our outstanding debt.

Regulatory Matters Update

Approximately 23% of revenue for the three months ended March 31, 2014 was derived directly from Medicare, state Medicaid programs or other government payors. We also provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs through managed care entities. Medicare Part D, for example, is administered through managed care entities and PBMs. In the normal course of business, the Company and our customers are subject to legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs.

State Medicaid Programs

Over the last several years, increased Medicaid spending, combined with slow state revenue growth, led many states to institute measures aimed at controlling spending growth. Spending cuts have taken many forms including reducing eligibility and benefits, eliminating certain types of services, and provider reimbursement reductions. In addition, some states have been moving beneficiaries to managed care programs in an effort to reduce costs.

No single state Medicaid program represents greater than 4% of our consolidated revenue for the three months ended March 31, 2014, and no individual state Medicaid reimbursement reduction is expected to have a material effect on our Unaudited Consolidated Financial Statements. We are continually assessing the impact of the state Medicaid reimbursement cuts as states propose, finalize and implement various cost-saving measures.

Given the reimbursement pressures, we continue to improve operational efficiencies and reduce costs to mitigate the impact on results of operations where possible. In some cases, reimbursement rate reductions may result in negative operating results, and we would likely exit some or all services where rate reductions result in unacceptable returns to our stockholders.


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States are also in the process of determining whether to expand their Medicaid programs as permitted by the PPACA. We cannot predict the impact of these decisions.

Medicare

Federal efforts to reduce Medicare spending have continued in 2014. Congress first passed the PPACA, followed by the Health Care and Education Reconciliation Act of 2010, which amended PPACA. In August 2011, Congress passed a deficit reduction agreement that created a committee tasked with proposing legislation to reduce the federal deficit by November 23, 2011. Because the committee did not act, automatic Medicare cuts were scheduled to go into effect January 1, 2013. However, Congress passed legislation extending the time for such cuts by two months. Thus, Medicare reimbursement to providers was reduced overall by 2% (as part of sequestration) beginning April 1, 2013. The reductions in Medicare reimbursement during the three months ended March 31, 2014 have not been significant but the impact on future results of operations cannot yet be predicted.

Critical Accounting Estimates

Our Unaudited Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from these estimates.

We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. There have been no changes to critical accounting estimates in the three months ended March 31, 2014. For a full description of our accounting policies please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.

Results of Operations

The following discussion is based on our Unaudited Consolidated Financial
Statements. It compares our results of operations for the three months ended
March 31, 2014 with the prior year results of operations. As a result of the
sale of substantially all of our Home Health Services segment on March 31, 2014,
all prior period financial information has been reclassified to include the Home
Health Services segment as discontinued operations.

                                                       Three Months Ended March 31,
                                                              (in thousands)
                                                2014                     2013              Change
Revenue                                $ 239,643                $ 181,129                $  58,514
Gross profit                           $  65,142      27.2  %   $  55,981      30.9  %   $   9,161
Income (loss) from continuing
operations                             $ (11,432 )    (4.8 )%   $  (2,187 )    (1.2 )%   $  (9,245 )
Interest expense, net                  $  10,499       4.4  %   $   6,478       3.6  %   $   4,021
Loss from continuing operations,
before income taxes                    $ (21,931 )    (9.2 )%   $  (8,665 )    (4.8 )%   $ (13,266 )
Loss from continuing operations, net
of income taxes                        $ (25,422 )   (10.6 )%   $  (8,441 )    (4.7 )%   $ (16,981 )
Income (loss) from discontinued
operations, net of income taxes        $     108         -  %   $     313       0.2  %   $    (205 )
Net loss                               $ (25,314 )   (10.6 )%   $  (8,128 )    (4.5 )%   $ (17,186 )

Revenue. Revenue for the three months ended March 31, 2014 was $239.6 million compared to revenue of $181.1 million for the three months ended March 31, 2013.

Infusion segment revenue for the three months ended March 31, 2014 was $221.4 million, compared to revenue of $154.4 million for the same period in 2013, an increase of $67.0 million, or 43.4%. Product revenue increased $65.9 million, or 43.9%, as a result of additional revenue from acquisitions as well as organic volume growth. Service revenue increased $1.2 million, or


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26.8%, as a result of a related increase in the volume of infusion nursing visits on the portion of the product revenue that required these services.

PBM Services segment revenue for the three months ended March 31, 2014 was $18.2 million, compared to revenue of $26.8 million for the same period in 2013, a decrease of $8.5 million, or 31.9%. This decrease in service revenue for the quarter was primarily due to the termination during the first quarter of 2013 of a large but low margin client with revenues of approximately $9.1 million and decreases in discount cash card revenue of $6.9 million. These decreases were partially offset by an increase in new funded business volume of approximately $9.8 million.

Gross Profit. Gross profit for the three months ended March 31, 2014 was $65.1 million compared to $56.0 million for the same period in 2013, an increase of $9.2 million, or 16.4%. The increase in gross profit dollars for the three month period was due to growth in the Infusion Services segment partially offset by lower PBM Services gross profit. The decrease in gross profit as a percentage of revenue from 30.9% to 27.2% was also mainly due to the decline in the mix of PBM Services business which operates as a comparatively high gross profit rate. The increase in Infusion Services gross profit was driven by organic growth and acquisitions.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2014 were $59.4 million, or 24.8% of total revenue, compared to $47.0 million, or 26.0% of total revenue, for the same period in 2013. The increase in SG&A expense is due mainly to acquisitions and also due to higher expenses required to drive and manage organic growth. The decrease in SG&A as a percentage of revenue was due to operating leverage attained on Infusion segment growth and due to a reduction of the PBM Services segment cash card business which incurs high selling costs as a percentage of revenue.

Change in Fair Value of Contingent Consideration. The change in fair value of contingent consideration for the three months ended March 31, 2014 resulted in income of $2.2 million. There was no change in the fair value of contingent consideration during the three months ended March 31, 2013. The adjustment recorded in 2014 was due to remeasurement at fair value of the probability of the sellers of HomeChoice earning contingent consideration based on gross profit performance versus targets. While the HomeChoice acquisition has generated expected revenues, the contingent consideration was an incentive for the sellers to partner with the Company which would result in performance significantly over and above the transaction valuation model. Based on performance in 2013 and 2014 and the 2014 business plans for these branches, we reduced the probability of payout and the fair value of this liability by $1.4 million. In addition, the contingent consideration related to the CarePoint Business acquisition was remeasured at fair value as of March 31, 2014 and resulted in a reduction of the fair value of contingent consideration of $0.9 million.

Bad Debt Expense. For the three months ended March 31, 2014, bad debt expense was $6.6 million, or 2.8% of revenue, compared to $3.2 million or 1.8% of revenue, for the same period in 2013. The increase in bad debt expense between periods is due in part to reserves provided on organic and acquired revenue growth. In addition, we recorded $2.0 million of bad debt expense in the three months ended March 31, 2014 due to disruption that occurred related to acquisition integration, particularly in merged markets where facilities, work teams and information systems were consolidated. As a result of the disruption over the past seven months, collections of accounts receivable were further negatively impacted during the first quarter of 2014 and this resulted in continued aging deterioration. A final factor in bad debt growth has been the continuing trend toward high-deductible plans which has put more financial responsibility on patients who do not always have the ability to pay.

Acquisition and Integration Expenses. During the three months ended March 31, 2014 and 2013, acquisition and integration expenses were $6.5 million and $4.6 million, respectively. These costs include legal fees, employee related costs and facility consolidation costs associated with acquisitions and integration related activities to convert to common policies, procedures, and information systems. In addition, the three months ended March 31, 2014 includes bad debt expense of $3.3 million recorded on acquired accounts receivable balances that are no longer deemed collectible. These acquired accounts receivable were reserved at historical collection rates as of December 31, 2013 but based on lower than expected collections in the first quarter of 2014, we no longer expect to achieve historical collection rates on the acquired accounts receivable.

Restructuring and Other Expenses. We incurred restructuring and other expenses of $4.6 million and $1.3 million during the three months ended March 31, 2014 and 2013, These expenses result from the execution of our strategic assessment and related restructuring plans, consisting primarily of employee severance and other benefit-related costs, third-party consulting costs, facility-related costs, and certain other costs. The increase between periods primarily resulted from higher third party consulting costs during the three months ended March 31, 2014. During the three months ended March 31, 2014, we also incurred $0.7 million of training and transition costs compared to $0.4 million during the three months ended March 31, 2013. Training and transition costs include costs related to training, redundant salaries and wages, and retention bonuses for certain critical personnel.


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Amortization of Intangibles. During the three months ended March 31, 2014, we recorded amortization of intangible assets of $1.7 million compared to $2.1 million for the prior year.

Interest Expense, Net. Net interest expense was $10.5 million for the three months ended March 31, 2014, compared to $6.5 million for the same period in 2013. The $4.0 million increase in interest expense resulted from an increase in long-term debt from $253.4 million at March 31, 2013 to $418.7 million at March 31, 2014 to fund the CarePoint Business acquisition. The increase in interest expense associated with higher debt levels was partially offset by lower interest rates.

Income Tax Expense (Benefit). Income tax expense for the three months ended March 31, 2014 was $3.5 million on a pre-tax net loss of $21.9 million compared to $0.2 million of income tax benefit for the three months ended March 31, 2013 on a pre-tax net loss of $8.7 million. Our income tax expense for the three . . .

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